1. Using the data and simplified assumptions of the case, what is the contribution per bottle on Freedom Farms' own product?
2. For Brian's product as proposed, what does Freedom Farms make in contribution?
3. What is theminimum priceFreedom Farms would need to charge on this processing contract? Why?
4. Should Stan and Laurel accept this opportunity? Explain the reasons for your answer. Explain your conclusions, including your calculations.

Case: Stan and Laurel's Juicy Decision (adapted)

Stan Amoroso sat in his truck with a broad smile on his face as he watched the construction team put the final touches on the twenty-fifth Freedom Farms Convenience Store. In another week, the launch team would be putting in the shelves and refrigerated units. The grand opening would soon follow. All of this would have been a dream just 10 years ago when Stan and his sister Laurel took over the family's dairy farm. They knew their isolated, southwestern quarter of the state was ripe for change. They decided to move away from dairy production and into convenience stores in small towns that were overlooked by the bigger chains. They kept their stores small and contracted out as much of their business as possible. The only exception was their acquisition of a small bottling plant four years ago where they processed milk from their home farm and a variety of juices, teas, and other drinks.

Laurel questioned whether the plant was a good investment. While the plant operated at around 90 percent of capacity processing milk and limited amounts of other products during the school year, the problem occurred during the summer when schools closed, and milk sales plummeted. They had also seen a decline in soft drink sales throughout the year as consumer tastes moved away from sodas. The bright spot was the increase in sales of juices and teas that they could process and sell for a hefty profit. Even with the increased sales of these items, it left the plant with considerable excess capacity during the summer and meager profits.

Stan estimated that they sold these products for $1.29 for a 16-ounce plastic screw-top bottle. The ingredients and bottles each cost them 12 cents to produce, for a total variable cost of 24 cents per bottle. They recently had the plant appraised for insurance purposes; its replacement cost was $138,000. They paid $75,000 and are depreciating it over 30 years. When they analyzed the major parts of their business, they all looked financially strong except for the processing plant. The low volume in the summer months just about consumed the plant's profits from the rest of the year. As he sat in the new store's parking lot, Stan's smart phone rang. He soon realized their fortunes could be taking a turn for the better.

The call was from Brian Harper, an organic farmer in the central part of the state. He was just starting out and was looking for a bottler for his signature mulberry bush fruit drink sold at farmers' markets. The peak season for this drink was June, July, and August. The quantities he wants to process would be a big jump in volume for the processing plant but within capacity, especially during the summer. Stan did not anticipate any special processing problems. Brian said he would deliver the raw ingredients to the plant and haul the finished goods back to his place. Since he wanted to sell the drink for $1.00, Brian was hoping to pay no more than 40 cents per bottle for processing. This is below the price Freedom Farms gets in their stores.

Simplified Assumptions:

• Fixed Costs of operating the plant are the same each quarter of the year.
• Freedom Farms' own product's volume is the same for each quarter, but effectively zero in Q3.
• The uncovered Q3 fixed costs effectively cancel out the sum of the profits of Freedom Farms' production in the other 3 quarters.
• In Brian's co-packing proposal, Stan & Laurel will provide the bottle, but Brian is supplying and delivering his own ingredients.